Allison Transmission Announces Second Quarter 2017 Results

Allison second quarter sales increased 22% from the same period in 2016; full-year sales guidance has been increased to 15-17%.

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Allison Transmission Holdings Inc., the largest global provider of commercial-duty fully-automatic transmissions, reports net sales for the second quarter of $580 million, a 22% increase from the same period in 2016. The increase in net sales was principally driven by higher demand in the Service Parts, Support Equipment & Other and Global On-Highway end markets.

Net Income for the quarter was $95 million compared to $61 million for the same period in 2016. Adjusted EBITDA, a non-GAAP financial measure, for the quarter was $225 million, or 38.8% of net sales, compared to $173 million, or 36.5% of net sales, for the same period in 2016. Net Cash Provided by Operating Activities for the quarter was $166 million compared to $170 million for the same period in 2016. Adjusted Free Cash Flow, a non-GAAP financial measure, for the quarter was $154 million compared to $157 million for the same period in 2016.

Lawrence E. Dewey, Chairman and Chief Executive Officer of Allison Transmission, comments, "Allison's second quarter 2017 results exceeded the full year guidance ranges we provided to the market on April 26 principally driven by stronger than anticipated demand for North America service parts and North America On-Highway products. Allison demonstrated solid operating margins and free cash flow while executing its well-defined approach to capital structure and allocation. During the second quarter, we settled $124 million of share repurchases and paid a dividend of $0.15 per share. Given second quarter 2017 results and current end markets conditions, we are updating our full year 2017 net sales guidance to an increase in the range of 15-17%."

Second Quarter Highlights

North America On-Highway end market net sales were up 13% from the same period in 2016 principally driven by higher demand for Rugged Duty Series, Highway Series and Transit/Other Bus models partially offset by lower demand in Pupil Transport/Shuttle models and up 17% on a sequential basis principally driven by higher demand for Rugged Duty Series, Highway Series and Pupil Transport/Shuttle models.

North America Hybrid-Propulsion Systems for Transit Bus end market net sales were down $1 million from the same period in 2016 and down $5 million sequentially, in both cases principally driven by the timing of certain transit property orders.

North America Off-Highway end market net sales were up $4 million from the same period in 2016 and up $4 million on a sequential basis, in both cases principally driven by higher demand from hydraulic fracturing applications.

Defense end market net sales were up $2 million from the same period in 2016 and up $3 million sequentially, in both cases principally driven by higher demand for Tracked Defense.

Outside North America On-Highway end market net sales were up 15% from the same period in 2016 and up 18% on a sequential basis in both cases principally driven by higher demand in Asia and Europe.

Outside North America Off-Highway end market net sales were up $7 million from the same period in 2016 and up $4 million sequentially, in both cases principally driven by improved demand in the China energy sector.

Service Parts, Support Equipment & Other end market net sales were up 53% from the same period in 2016 principally driven by higher demand for North America Off-Highway service parts, North America On-Highway service parts and Global Support Equipment, and up 15% on a sequential basis principally driven by higher demand for North America Off-Highway service parts and Global Support Equipment.

Gross profit for the quarter was $290 million, an increase of 28% from $227 million for the same period in 2016. Gross margin for the quarter was 50.0%, an increase of 220 basis points from a gross margin of 47.8% for the same period in 2016. The increase in gross profit from the same period in 2016 was principally driven by increased net sales and price increases on certain products partially offset by higher incentive compensation expense and higher manufacturing expense commensurate with increased net sales.

Selling, general and administrative expenses for the quarter were $88 million, an increase of $10 million from $78 million for the same period in 2016. The increase was principally driven by higher incentive compensation expense, increased commercial activities spending and higher stock-based compensation expense.

Engineering – research and development expenses for the quarter were $25 million, an increase of $3 million from $22 million for the same period in 2016. The increase was principally driven by higher incentive compensation expense and increased product initiatives spending.

Net income for the quarter was $95 million compared to $61 million for the same period in 2016. The increase was principally driven by increased gross profit partially offset by increased income tax expense, increased selling, general and administrative expense, increased technology-related investment expense and increased engineering – research and development expense.

Second Quarter Non-GAAP Financial Measures

Adjusted EBITDA for the quarter was $225 million, or 38.8% of net sales, compared to $173 million, or 36.5% of net sales, for the same period in 2016. The increase was principally driven by increased net sales and price increases on certain products partially offset by higher incentive compensation expense, higher manufacturing expense commensurate with increased net sales, increased commercial activities spending and increased product initiatives spending.

Adjusted Free Cash Flow for the quarter was $154 million compared to $157 million for the same period in 2016, a decrease of $3 million. The decrease was principally driven by increased accounts receivable commensurate with increased net sales, increased cash income taxes and increased cash interest expense partially offset by increased gross profit, higher accounts payable and decreased capital expenditures.

Full Year 2017 Guidance Update

Updated full year 2017 guidance includes a year-over-year net sales increase in the range of 15-17%, Adjusted EBITDA margin in the range of 35.5-36.5%, Adjusted Free Cash Flow in the range of $485 to $505 million, capital expenditures in the range of $85 to $95 million, which includes maintenance spending of approximately $80 million, and cash income taxes in the range of $80 to $90 million. 

Allison's full year 2017 net sales guidance reflects stronger demand for North America Off-Highway service parts, North America On-Highway products and Global Off-Highway products. Its full year 2017 net sales outlook also assumes price increases on certain products.    

Although it is not providing specific third quarter 2017 guidance, Allison does expect third quarter net sales to be up from the same period in 2016 principally driven by increased demand for North America On-Highway products, North America Off-Highway service parts and Global Off-Highway products.

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